Download The Impact of Structural Adjustment on Income Distribution in

The Pakistan Development Review
37 : 4 Part II (Winter 1998) pp. 37:4, 377–397
The Impact of Structural Adjustment on
Income Distribution in Pakistan
A SAM-based Analysis
ZAFAR IQBAL and RIZWANA SIDDIQUI
1. INTRODUCTION
Domestic poverty and income distribution are closely related to the state of the
economy, which is linked with internal and external economic policies. Since 1988,
under the rubric of structural adjustment programme (SAP), Pakistan has made use of
fiscal, monetary and trade policies to correct her macro economic imbalances. It is hard
to substantiate with proof that these programmes protect the poor. A number of studies
have found that income distribution has been getting worse during the adjustment period
in Pakistan.1 For example, Kemal (1994); Jaffery and Khattak (1995) and Anwar (1996)
found that SAP accompanied with rising income inequality and poverty in Pakistan.
But these studies are restricted as they did not employ an adequate methodology to
assess the impact of structural adjustment reforms on income distribution.2 This paper,
however, uses a simple static fixed-price SAM-based framework to analyse
distributional outcome of incomes for rural and urban households. This methodology is
useful because social accounting matrix (SAM) represents the whole economy and it
does not need a large data set.
This study uses latest social accounting matrix for the year 1989-90 with possible
disaggregation of the households sector based on income levels. It is worth to note that
earlier social accounting matrix (SAM) for the year 1984-85 developed by the Federal
Bureau of Statistics did not provide a disaggregation of the households sector. This
limits the analysis of the households sector, particularly when distributive and
redistributive aspects need to be given importance. Therefore, SAM-1989-90 fills this
Zafar Iqbal and Rizwana Siddiqui are Senior Research Economist and Research Economist at the
Pakistan Institute of Development Economics, Islamabad, respectively.
1
For other developing countries opting for SAP, see Khan (1993), who concluded that out of 55
countries only seven succeeded to achieve positive impact on income distribution.
2
White (1995) and McGillivary et al. (1994)) argued that performing counter factual analysis using
econometric or general equilibrium models is the most legitimate approach to examining the relationship
between poverty and economic reforms.
37:4, 378
Iqbal and Siddiqui
gap. Second, this paper intends to analyse the impact of fiscal policy relating to
subsidies (production and consumption subsidies), government current expenditure and
expenditure on health and education on incomes of various urban and rural households
in Pakistan. It attempts to seek an appropriate answer of the main research question: Are
these policies detrimental to incomes of urban and rural households in Pakistan?
The plan of the paper is as follows. Following introduction, Section 2 presents
historical overview of adjustment policies and income distribution in Pakistan. Section
3 describes methodology and data. Results are discussed in Section 4. Final section
gives conclusion.
2. HISTORICAL OVERVIEW OF ADJUSTMENT POLICIES
AND INCOME DISTRIBUTION
Fiscal performance of Pakistan deteriorated significantly up to financial year
1987-88. Budget deficit reached to 8.5 percent of GDP in 1987-88. A large portion of
government expenditure was utilised for subsidy provision as consumer subsidies were
supposed to help the poor and production subsidies to provide assistance in production
process and for exports. At the same time, there have been many tax exemptions.
Pakistan, therefore, was needed tax reforms with efficiency and equity objectives as
well as to reduce budget deficit by revenue generation accompanied with reduction in
current expenditure in order to free resources for development expenditure. In the first
extensive adjustment programme embarked on July 1988, a number of
recommendations were made by the IMF and the World Bank. It was recommended that
tax revenue should be increased from 13.0 percent of GDP in 1986-87 to 16.9 percent of
GDP in 1992-93 with an increase in direct tax revenue from 1.9 percent of GDP to 3.3
percent of GDP and indirect tax revenue from 11.2 percent of GDP to 13.6 percent of
GDP. At the same time, it was emphasised a gradual reduction in government total
expenditure from 26.7 percent of GDP in 1987-88 to 24.8 percent of GDP in 199091 by reducing current expenditure with main emphasis on lowering subsidies
from 1.7 percent of GDP to 0.5 percent of GDP. Therefore, since 1988 the
government has been making strenuous efforts to reverse the inherited trend in
fiscal balance by broadening the tax base, abolishing tax exemptions and tax
holidays and increasing the elasticity of tax system by shifting the emphasis from
imports to domestic consumption. Initially, consumption subsidies were incurred
to provide safeguard to poor against rising prices of essentials, such as wheat,
edible oils while production subsidies were aimed to promote economic activities
in areas with long run interest of the nation. But under the deregulation plan and
to move towards more market oriented economy, subsidies are substantially
withdrawn from 1.7 percent of GDP in 1988-89 to 0.5 percent of GDP in 1997-98
as reported in Table 1. Current and development expenditures are also declined,
respectively, from 19.8 percent to 18.8 percent of GDP and from 6.9 percent to 3.1
Structural Adjustment and Income Distribution
37:4, 379
Table 1
Key Indicators of Fiscal Policy in Pakistan (% of GDP)
Government Expenditure
Subsidies Health1 Education1
Budget
Deficit
Year
Tax Revenue
Total
1987-88
13.8
26.7
1.50
1.0
2.4
8.5
1988-89
14.3
26.1
1.66
1.0
2.4
7.4
1989-90
14.0
25.7
1.47
1.0
2.2
6.5
1990-91
12.7
25.6
1.10
0.9
2.1
8.7
1991-92
13.6
26.5
0.94
0.7
2.2
7.4
1992-93
13.3
26.0
0.73
0.7
2.2
8.0
1993-94
13.2
23.2
0.58
0.7
2.2
5.9
1994-95
13.7
22.8
0.35
0.6
2.4
5.6
1995-96
14.1
23.9
0.64
0.8
2.4
6.3
1996-97
13.5
22.3
0.54
0.8
2.6
6.2
1997-98
12.9
21.1
0.48
0.7
2.3
5.4
Source: Pakistan (various issues).
1
Expenditure on health and education are as percentage of GNP.
percent of GDP. Fiscal deficit has declined from 8.5 percent of GDP in 1987-88 to
5.4 percent of GDP during 1997-98. Table 1 also shows that public expenditure on
education and health are declined, although SAP directed to increase expenditure
on education and health. Though, the fiscal adjustment programmes emphasise
resource mobilisation and low income groups are supposed to be protected, recent
studies show that income inequality has increased during the period of adjustment
in Pakistan. Historical trend in income distribution indicated by gini-coefficients
along with GDP growth rates are presented in Table 2. It shows that the country
has been growing satisfactorily, but income distribution has worsened over the
period 1988 to 1994. Gini coefficients for Pakistan as a whole and for rural and
urban areas reported in Table 2 show that gini-coefficients increased for Pakistan
from 0.35 in 1987-88 to 0.40 in 1993-94, for rural areas from 0.31 to 0.35 and for
urban areas from 0.37 to 0.40 for the same years. Table 2 also shows that on the
whole, income distribution during the period under consideration is more worse in
urban area as compared to in rural area except in 1990-91. It seems that benefits of
growth did not trickle down to the poor. However, these results have provoked us
to conduct a study on income distribution to determine the possible causes of this
outcome.
Iqbal and Siddiqui
37:4, 380
Table 2
Trends of Gini Coefficients and Growth Rates of GDP
Years
1987-88
1990-91
1992-93
1993-94
Pakistan
0.35
0.41
0.41
0.40
Gini Coefficients
Rural
0.31
0.41
0.37
0.35
Urban
0.37
0.39
0.42
0.40
Growth rate
of GDP (%)
6.44
5.57
2.27
4.54
Source: Economic Survey, 1997-98.
3. METHODOLOGY AND DATA
This section describes salient features of SAM 1989-90 [Siddiqui and Iqbal
(1999)]. After this, it briefly explains a simple static fixed-price SAM-based model,
which is used to analyse the impact of selected fiscal policies under structural
adjustment on households incomes.
31 Structure of a Social Accounting Matrix
Interest in the social accounting matrix has mainly occurred in the last three
decades, when it was extensively used as a tool for policy analysis. For example, Pyatt
and Round (1977, 1979, 1985); Pyatt (1985, 1988, 1991, 1991a); King (1985);
Thorbecke (1985); James and Khan (1993) and Iqbal (1996) all provide excellent
introduction to SAMs and their uses. The SAM framework is also commonly used in
computable general equilibrium (CGE) models for analysing structural adjustment
reforms and their impact on income distribution and poverty in developing countries, for
example, Robinson (1988) and Taylor (1990) provided a comprehensive survey on
SAM-based CGE modelling. The classification and disaggregation of accounts in a
social accounting matrix can take various forms, depending on how the constituent
accounts are defined and depending on one’s analytical interests and specific policy
concerns.
The I-O Table (1996) provides an elaboration of production account of the
system of national accounts in Pakistan for the year 1989-90. The Integrated Economic
Accounts (IEA) for the same year 1989-90 have also been compiled in conjunction with
the I-O table for 1989-90.3 The IEA was developed using different data sources, for
example, National Accounts Statistics; Balance of Payment Statistics; Household
Income and Expenditure Survey; and Public Finance Statistics. The Integrated
Economic Accounts provide a comprehensive overview of interrelationships between
3
Institutional Sector Accounts for 1984-85 and Integrated Economic Accounts for 1989-90 have
almost similar characteristics.
Structural Adjustment and Income Distribution
37:4, 381
economic agents involved in income generation, distribution, accumulation and finance
in the economy. The full details of the methodology and data sources used in the
preparation are described in the main documents of I-O table and IEA for 1989-90.4
Since the FBS did not produce the social accounting matrix for the year 1989-90,
we attempt to compile a social accounting matrix for 1989-90, using input-output table
and integrated economic accounts for the same year. It yields a 29×29 social accounting
matrix of Pakistan.5 A Social Accounting Matrix for the year 1989-90 summarised but
comprehensive picture of the whole economy by showing the interrelationship among
different aspects of economic transactions in production, consumption, and investment.
According to standard accounting principles of a SAM, incoming (income) in one
account is balanced by an outgoing (expenditure) of another account. Since incoming
and outgoing are recorded in a single entry system, the social accounting matrix is a
square matrix by definition. For every row there is a corresponding column and sum
along the row is equal to the sum along the corresponding column. The SAM presents
four types of accounts: factors account, institutions account, production account, and
capital account. These accounts are disaggregated on the basis of requirements and
availability of data. Factors of production account is disaggregated into labour and
capital accounts. Institutions accounts consist of households, firms (non-financial and
financial), government, and rest of the world. Households account is further
disaggregated by four income categories of rural and urban households. These accounts
elaborate the inter-institutional linkages. Production account is disaggregated into
agriculture, industry, education, health and other sectors. Further disaggregation of
production account is also made on the basis of m goods for domestic market and for
export market. Finally, it presents consolidated capital account.6 Since our analysis
mainly focus on the households sector, the following sub section describes the
disaggregation of the households by income groups and their sources and uses of
income in a more detail.
31 Sources and Uses of Incomes of Households
Sources of Income of Households
Table 3 shows the sources of incomes of various urban and rural income groups
during the year 1989-90. These estimates are derived of social accounting matrix for
1989-90 [Siddiqui and Iqbal (1999)]. Both urban and rural households are distinguished
into four income groups namely lowest income group having monthly income upto
Rs 2500, low income group Rs 2501–4000, middle income group Rs 4001–7000
4
For IEA, see Rizvi (1996). For I-O table see Pakistan (1996), Supply and Use Tables of Pakistan
1989-90.
5
Since the compilation of a SAM is quite flexible, it has been condensed according to our own
choice and specific policy objectives.
6
For detailed discussion on the salient features of SAM, see Siddiqui and Iqbal (1999).
37:4, 382
Iqbal and Siddiqui
Table 3
Structural Adjustment and Income Distribution
37:4, 383
and high income group Rs 7001 and above. Starting from urban households, Table 3
indicates that wages and salaries contribute the highest share of 54.2 percent in the total
income of the urban lowest income group while the remaining sources of income of this
group are operating surplus (42.2 percent), dividends from firms (1.1 percent), transfers
from the government (1.1 percent) and transfers from the rest of the world (1.3 percent).
Similarly, for the second urban low income group, wages and salaries contributes 46.7
percent, operating surplus 44.7 percent, dividends from firms 4.3 percent, transfers from
the government 0.56 percent, and transfers from the rest of the world 3.7 percent in its
total income. As contrast to the earlier two urban income groups, the middle and high
income groups, respectively, receive largest shares from operating surplus 46.7 percent
and 40.1 percent. While the remaining sources of incomes of both the middle and high
income groups are, correspondingly, wages and salaries 38.8 percent and 28.5 percent,
dividends from firms 5.8 percent and 11.6 percent, transfers from the government 1.0
percent and 2.1 percent, and transfers from the rest of the world 7.7 percent and 17.7
percent of their total incomes.
Regarding the rural households, operating surplus contributes the largest shares
in incomes of all the four categories of rural income groups, i.e. 56.6 percent, 68.3
percent, 72.0 percent and 61.5 percent in incomes of the lowest, low, middle and high
income groups, respectively. While the other sources of incomes of all the four rural
income groups are, correspondingly, wages and salaries 37.4 percent, 21.3 percent, 15.5
percent, and 7.6 percent; dividends from firms 2.6 percent, 5.2 percent, 7.4 percent, and
17.1 percent; transfers from the government 0.75 percent, 0.5 percent, 0.31 percent, and
4.3 percent; and transfers from the rest of the world are 2.7 percent, 4.7 percent, 4.8
percent and 9.6 percent.
Uses of Income by Rural and Urban Households
The uses of incomes are summarised in Table 4 from SAM-1989-90 [Siddiqui
and Iqbal (1999)]. It shows that total uses of income are equal to total sources of
income of respective income groups. Starting from urban households, Table 4 shows
that of the total uses of income, the largest share is spent on manufactured products by
all the four urban income groups such as 56.0 percent by the lowest income group, 45.8
percent by the low income group, 38.4 percent by the middle income group and 22.7
percent by the highest income group. The second largest expenditure component is on
agricultural product where the lowest income group spends 43.2 percent, low income
group 34.9 percent, middle income group 28.2 percent and high income group 15.7
percent of their total incomes. On other activities (including services), lowest income
group spends 29.8 percent, low income group, 27.2 percent, middle income group 25.0
percent and high income group 23.9 percent of their incomes. Table 4 also shows that all
37:4, 384
Iqbal and Siddiqui
Table 4
Structural Adjustment and Income Distribution
37:4, 385
these groups spend a small share i.e., less than 2 percent of their incomes on both
education and health. It is interesting to note that all the urban income groups pay less
than 1 percent of their incomes as a direct taxes to the government. It is also evident
from Table 4 that both urban lowest and low income groups are net dissavers (i.e. –30.8
percent and –10.0 percent of their income, respectively) while the other two groups
middle and high income groups save, respectively, 6.0 percent and 35.4 percent of their
total incomes.
Regarding rural households, Table 4 shows different uses of incomes by the
lowest, low, middle and high income groups in Pakistan. As similar to urban
households, it shows that all rural income groups spend largest proportion of their
incomes (i.e. 57.3 percent, 42.2 percent, 33.4 percent, and 16.6 percent, respectively) on
manufactured goods. While the second largest consumption component is agricultural
product on which they spend, correspondingly, 45.9 percent, 34.1 percent, 26.2 percent,
and 12.8 percent of their total incomes. The expenditure on other commodities
(including services) remains 23.7 percent, 19.5 percent, 17.4 percent, and 11.0 percent,
respectively. As similar to urban income groups, the rural income groups also spend a
small proportion of their income on health and education which is even lesser than
spending by the urban groups. The rural income groups also pay a small amount of
their incomes (i.e. less than 1 percent except highest income group which pays 1.3
percent) as direct taxes to the government. Table 4 shows that the rural lowest income
group is a net dissaver of 28.6 percent of its income while the other groups are the
savers as the low income group saves 2.9 percent, middle income group 21.7 percent,
and high rural income 57.7 percent of their total incomes in 1989-90.
31 A SAM-based Model
A static fixed-price SAM-based model is used to calculate the impact
multipliers of socio-economic linkages using the social accounting matrix for the
year 1989-90 [Siddiqui and Iqbal (1999)]. This simple model provides multipliers in
a general equilibrium framework. The multipliers can be further decomposed in
order to derive the direct and indirect effects and the main causal linkages underlying
the structure of the economy. Pyatt and Round (1985) provided a comprehensive
measure of multiplier analysis, which is also used here. The multiplier model
includes Leontief input-output multipliers and the impact of exogenous shocks on
income generation, distribution and consumption. The procedure of the multiplier
analysis is as follows. In a SAM-based analysis, it is a common practice to take
government accounts, capital accounts, and the rest of the world accounts as
exogenous, on the assumption that they are externally determined. Thus, exogenous
accounts are taken into vector x and total incomes of the endogenous accounts as
vector y, while the transactions of the endogenous accounts relative to total income
are taken as matrix A. All these lead to the following equation:
Iqbal and Siddiqui
37:4, 386
y = Ay + x = (I – A)–1. x = Ma . x
…
…
…
…
(1)
The aggregate multiplier (Ma) in Equation (1) can be further decomposed into
three matrices M1, M2, and M3 in order to derive direct and indirect effects. M1 captures
the effects of one group on itself through direct transfers. M2 captures the cross-effects
of the multipliers process whereby an injection into one part of the system has
repercussions on other parts. Matrix M3 shows the full circular effects of an income
injection going round the system and back to its point of origin in a series of repeated
and dampening cycles. The mathematical expression is as follows:
y = (M3.M2.M1) . x
…
…
…
…
…
… (2)
Pyatt and Round respecify Equation (2) as:
y = (I + T + O + C) . x
…
…
…
…
…
(3)
where
I
T
O
C
=
=
=
=
initial impulse or identity multiplier (unit increase).
(M1 – I) named as transfer multiplier.
(M2 – I). M1 named as open-loop multiplier.
(M3 – I) . M2 . M1 named as closed -loop multiplier.
In this study, using Equation (3), we undertake the multiplier analysis and
simulate some exogenous changes relating to fiscal policy in Pakistan. The simulation
results will provide the direct and indirect effects of exogenous shocks on income
distribution of aforementioned various urban and rural income groups.
4. RESULTS AND DISCUSSION
Using the SAM-based model, the aggregate multipliers (Ma) and its
decomposition into initial impulse (I), transfer multiplier (T), open-loop multiplier (O),
and closed-loop multiplier (C) are calculated and are reported in Appendix Table 1. It
shows that values in column (Ma) give the ‘backward’ linkages of the endogenous
accounts, which indicate the measure of the opportunities offered to suppliers arising
from marginal changes in final demand (i.e. exogenous accounts). The vector of the
sum of rows gives the ‘forward’ linkages or the effect of changes in supply on output of
using sectors. The multipliers for all endogenous accounts imply a high degree of
integration of the accounts. For the production sectors, backward linkages are strongest
for the education, followed by agriculture, health, other sectors and industry. The largest
forward linkage multipliers, which give the total effect on each account of a unit change
Structural Adjustment and Income Distribution
37:4, 387
in all endogenous accounts, are found for industry, followed by other sectors,
agriculture, health, and education. Regarding the households income groups, the largest
backward linkage is for the urban poorest (HU1 having income less than Rs 2500 per
month) and smallest for the rural rich (HR4 having income more than Rs 7000 per
month). While the largest forward linkage is for the rural poorest (HR1 having income
less than Rs 2500 per month) and smallest for the urban poorest (HU1 having income
less than Rs 2500 per month).7
For the present analysis, we focus on Table 5 which gives the simulation results
of changes in various exogenous accounts on all households income groups along with
other endogenous accounts. Here, the simple simulation exercise assesses the nature of
socio-economic linkages in Pakistan’s economy. Table 5 summarises the results of the
simulations of various exogenous injections relating to selected structural adjustment
reforms in Pakistan. The simulation results are briefly explained as follows:8
(i) 50 Percent Reduction in Subsidies
In almost all the structural and sectoral adjustment programmes, the much
emphasis has been placed on reduction in subsidies. As indicated earlier in Table 1,
since the embarkation of SAP, subsidies have been significantly reduced from Rs 7.3
billion in 1988-89 (1.7 percent of GDP) to Rs 3.2 billion (0.5 percent of GDP) in 199798, showing one of the most significant compliance indicators of structural adjustment
programmes in Pakistan. Using the simple model described above, the simulations are
performed by reducing the overall subsidies as well as consumption and production
subsidies separately by 50 percent. The results are reported in Table 5. Starting from
reduction in overall subsidies, Table 5 shows that the incomes of richest rural (HR4
having income more than Rs 7000 per month) and richest urban (HU4 having income
more than Rs 7000 per month) are the most affected as their incomes declined by 3.5
percent and 2.3 percent, respectively. The second most affected income groups by
reducing subsidies are the poorest urban and poorest rural (HU1 and HR1 both having
income less than Rs 2500 per month) as their incomes are reduced by 2.1 percent and
1.9 percent, respectively. Reducing consumption and production subsidies separately
by 50 percent, production subsidies affects the poorest group the most. The second
most affected groups are the poorest urban and poorest rural. These results imply that
the richest people in the country are the higher beneficiary of subsidies provided by the
government. Regarding the producing sectors, the reduction in overall subsidies has
more adverse impact on the agriculture sector, followed by industry, other sectors,
7
The multipliers need to be interpreted with caution because of several restrictive assumptions
underlying the multiplier methodology.
8
The results should be interpreted with caution because of the assumption of no supply constraints
in the system.
37:4, 388
Iqbal and Siddiqui
Table 5
Structural Adjustment and Income Distribution
37:4, 389
health, and education. Table 5 also shows that operating surplus of the capital declines
more than the wages of the labour due to a reduction in overall subsidies.
(ii) 5 Percent Reduction in Government Overall Current Expenditure
All the World Bank-IMF adjustment programmes have emphasised that Pakistan
should reduce public current expenditure in order to correct the persistent fiscal
imbalances. Public current expenditures were19.8 percent of GDP in 1987-88, which
declined to 18.0 percent of GDP in 1997-98. The persistent reduction in current
government spending is taken as one of the indicators of the implementation of
adjustment reforms in Pakistan. A summary of the main results of a reduction in
government current expenditure is presented in Table 5. To standardise the simulations,
we have reduced the level of government overall current expenditure by 5 percent below
that of the base year 1989-90. The effects of a contraction in government spending
appear to be negative on the incomes of all the urban and rural household groups. The
largest reduction appears in the income of the richest rural (HR4), followed by poorest
urban (HU1), whose incomes are reduced by 1.9 percent and 1.8 percent, respectively.
Regarding factors of production, labour income is affected more (1.9 percent reduction)
than capital income (1.7 percent decline). For the production sector, reduction in
government current spending has more adverse impact on education followed by health,
other sectors, agriculture and industry.
(iii) 10 Percent Reduction in Government Expenditure
on Education and Health
In the recent adjustment reforms, it has been greatly emphasised to
increase investment on education and health in order to enhance human capital in
the country. The role of human capital in explaining variation in the rate of
growth of output is one that has been given considerable attention in the current
literature relating to economic growth in developing countries. Recent economic
growth studies have listed human capital as a primary source of economic
growth.9 In spite of this positive phenomenon, government expenditure on
education and health has been declining from 3.4 percent of GDP in 1987-88 to
3.0 percent of GDP in 1997-98, although the Bank-Fund guided programmes
emphasised to increase investment on human capital. Table 5 shows that the
simulation result of 10 percent decline in public expenditure on education and
health reduces activities in the education sector by 7.6 percent and the health
9
Iqbal and Zahid (1998); Barro and Sala-i-Martin (1995); Barro and Lee (1994); Mankiw et al.
(1992); Barro (1991, 1989); Romer (1990); Becker et al. (1990); Lucas (1988) and Psacharopoulos (1973)
argued that promoting human capital is instrumental in enhancing economic growth.
37:4, 390
Iqbal and Siddiqui
sector by 5.1 percent. It also shows that the poorest urban (HU1) and poorest
rural (HR1) adversely affected more than the other relatively better-off urban
and rural income groups by reducing public expenditure on health and education
as the incomes of both the groups decline. Similarly, income of the labour
declines relatively more than operating surplus of the capital.
(iv) Simulation Result of all Three Policies
Each adjustment programme for Pakistan contains a set of policy variables
that need to be implemented simultaneously. Therefore, all the aforementioned
policy variables (i.e., 50 percent reduction in overall subsidies, 5 percent
reduction in overall government current expenditure, and 10 percent reduction in
government expenditure on education and health) are now taken together and the
policy simulations are performed collectively. The results of the combinations
of the policy reforms are reported in Table 5, which show that all joint policies
have considerable negative impact on incomes of all the rural and urban
households groups. Among the urban households, the poorest income group
affected more than the other income groups as its income is reduced by 4.5
percent. Among rural households, the richest rural income group is affected
more as its income is reduced by 5.5 percent, followed by the poorest rural
income group whose income is declined by 4.1 percent. Regarding factors of
production, labour income is affected negatively more than income of the capital.
Among the production sectors, combined adjustment policies have considerable
negative impact on education, followed by the health sector as activities in these
sectors are declined by 11.9 percent and 9.1 percent, respectively.
5. CONCLUDING REMARKS AND EXTENSION OF WORK
Structural adjustment reforms advocated by the World Bank and the IMF began
in Pakistan in 1988. The Bank-Fund adjustment programmes were intended primarily
to overcome a variety of macroeconomic distortions as well as a set of deep-rooted
structural problems in the economy. After more than a decade of intensive adjustment
reforms, still no consensus can be found about the effects they have had on Pakistan’s
economy. More recently, the important area of research is to analyse the social impact
of adjustment reforms, particularly on income distribution and poverty, using an
appropriate quantitative framework. Therefore, this paper attempts to contribute to a
more adequate assessment of structural adjustment reforms on income distribution in
Pakistan.
Given that the first objective is to understand Pakistan’s economy, the
starting point is to design a social accounting matrix that, through appropriate
Structural Adjustment and Income Distribution
37:4, 391
choice of classifications, can capture its important characteristics and the
problems it faces. Therefore, a latest social accounting matrix for the year 198990, using the Integrated Institutional Accounts and Input-Output Table for the
same year, is compiled. The matrix framework provides useful information
about the structure of Pakistan’s economy. Within this framework, the preferred
classifications of various accounts are undertaken according to the policy
objectives and later model building. Here, the matrix is used as a tool for
structural analysis to provide a quantitative description of the process of
production, consumption, distribution, and accumulation.
Using a static fixed-price SAM-based model, related simulation exercises
are performed to describe the impact of three key structural adjustment policies
such as 50 percent reduction in subsidies, 5 percent reduction in overall public
current spending, and 10 percent reduction in public spending on education and
health (referred as human capital) on incomes of various urban and rural
households groups in Pakistan. The main conclusions are as follows. First, the
results show that reduction in subsidies has the more adverse impact on the
incomes of richest rural and urban households, implying that the richest people
in the country are the higher beneficiary of subsidies provided by the
government. The second most affected income groups by reducing subsidies are
the poorest urban and poorest rural. In particular, consumption subsidies are
basically to provide assistance in consumption to the poor but the richest urban
and rural groups are benefiting more. Second, the effects of a contraction in
government spending appear to be negative on the incomes of all the urban and
rural household groups. The largest reduction appears in the income of the
richest rural, followed by poorest urban. Third, the simulation results show that
decline in public expenditure on education and health discourages activities in
the education and health sectors. It also shows that the poorest urban and
poorest rural are affected more than the other relatively better-off urban and rural
income groups. Finally, the results of the combinations of the policy reforms
show that all joint policies have considerable negative impact on incomes of all
the rural and urban households groups. Among the urban households, the
poorest income group affected more than the other income groups. Among rural
households, the richest rural income group is affected more, followed by the
poorest rural income group. However, policy implications derived from the
results obtained in the study are limited in nature though a fair idea can be
obtained about the impact of changes in exogenous demand, that is, the results
show that structural adjustment programmes have worse distributional impact on
urban and rural households incomes in Pakistan.
37:4, 392
Iqbal and Siddiqui
Appendix Table 1
Structural Adjustment and Income Distribution
37:4, 393
REFERENCES
Anwar, Tilat (1996) Structural Adjustment and Poverty: The Case of Pakistan. The
Pakistan Development Review 35:4 911–926.
Barro, R. J. (1989) A Cross-country Study of Growth, Saving, and Government.
National Bureau of Economic Research. Cambridge, Massachusetts. (NBER
Working Paper No. 2855.)
Barro, R. J. (1991) Economic Growth in a Cross Section of Countries. Quarterly
Journal of Economics 106:2 407–443.
Barro, R. J., and J. W. Lee (1994) Losers and Winners in Economic Growth.
Proceedings of the World Bank Annual Conference on Development Economics,
267–297.
Barro, R. J., and X. Sala-i-Martin (1995) Economic Growth. McGraw Hill.
Becker, G., K. Murphy, and R. Tamura (1990) Human Capital, Fertility, and Economic
Growth. Journal of Political Economy 98:5 12–37.
Federal Bureau of Statistics (1993) Input-Output Table for 1984-85. Islamabad:
Statistics Division, Government of Pakistan.
Iqbal, Z. (1996) Three Gap Analysis of Structural Adjustment in Pakistan. Ph.D.
Dissertation, Tilburg University, the Netherlands (Unpublished).
Iqbal, Z., and G. M. Zahid (1998) Macroeconomic Determinants of Economic Growth
in Pakistan. The Pakistan Development Review 37:2 125–148.
Jaffery, S. M. Younas, and A. Khattak (1995) Income Inequality and Poverty in
Pakistan. Pakistan Economic and Social Review 33:1&2 37–58.
James, J., and H. A. Khan (1993) The Employment Effects of an Income Redistribution
in Developing Countries. World Development 21:5 817–827.
Kemal, A. R (1994) Structural Adjustment, Employment, Income Distribution and
Poverty. The Pakistan Development Review 33:4 901–911.
Khan, A. Rehman (1993) Structural Adjustment and Income Distribution: Issues and
Experiences. GENEVA: ILO, United Nations.
King, B. B. (1985) What is SAM? In Pyatt and Round (eds) Social Accounting
Matrices: A Basis for Planning. Washington, D.C.: World Bank.
Lucas, R. (1988) On the Mechanics of Economic Development: W. A. Mackintosh
Lecture. Journal of Monetary Economics 22:1 3–42.
Mankiw, G. N., D. Romer, and D. N. Weil (1992) A Contribution to the Empirics of
Economic Growth. Quarterly Journal of Economics 107: 407–437.
McGillivary, Mark, Howard White, and Afzal Ahmad (1995) Evaluating the
Effectiveness of Structural Adjustment Policies on Macroeconomic: A Review of
the Evidence with
Special Reference to Pakistan. Pakistan Journal of Applied
Economics 11:1 & 2 57–75.
Pakistan, Government of (1996) Supply and Use Tables of Pakistan 1989-90.
37:4, 394
Iqbal and Siddiqui
Islamabad: Statistics Division, Federal Bureau of Statistics.
Pakistan, Government of (Various Issues) Economic Survey. Islamabad: Finance
Division, Economic Advisor’s Wing.
Psacharopoulos, G. (1973) Returns to Education. San Francisco: Jossey-Bass.
Pyatt, G. (1985) Commodity Balances and National Accounts: A SAM Perspective.
Review of Income and Wealth Series 31:1 155–169.
Pyatt, G. (1988) A SAM Approach to Modelling. Journal of Policy Modelling 10:3
327–352.
Pyatt, G. (1991) SAMs, The SNA and National Accounting Capabilities. Review of
Income and Wealth Series 37:2 179–199.
Pyatt, G. (1991a) Fundamentals of Social Accounting. Economic Systems Research 3:3
315–341.
Pyatt, G., and J. I. Round (1977) Social Accounting Matrices for Development
Planning. Review of Income and Wealth 23: 4 339–364.
Pyatt, G., and J. I. Round (1979) Accounting and Fixed-Price Multipliers in a Social
Accounting Matrix Framework. Economic Journal 89: 850–873.
Pyatt, G., and J. I. Round (1985) Social Accounting Matrices: A Basis for Planning.
Washington, D.C.: World Bank.
Rizvi, S. R. H. (1996) Integrated Economic Accounts for 1989-90. Islamabad: Federal
Bureau of Statistics, Statistics Division.
Robinson, S. (1988) Multisectoral Models. In H. B. Chenery and T. N. Srinivassan (eds)
Handbook of Development Economics, Volume II. Amsterdam: North-Holland.
885–947.
Romer, P. M. (1990) Human Capital and Growth. Paper Presented at the CarnegieRochester Conference on Economic Policy. Rochester, New York.
Siddiqui, R., and Iqbal Z. (1999) Salient Features of Social Accounting Matrix of
Pakistan: 1989-90. Disaggregation of the Household Sector. (MIMAP-Pakistan
Technical Paper Series No.1.)
Taylor, L. (1990) Socially Relevant Policy Analysis, Structuralist CGE Models for the
Developing World. Cambridge: MIT Press.
Thorbecke, E. (1985) The Social Accounting Matrix and Consistency-type Planning
Models. In Pyatt and Round (eds) Social Accounting Matrices: A Basis for Planning.
Washington, D. C.: World Bank.
White, Howard (1995) Is the World Bank Right About African Adjustment? Prepared
for Economic Research Seminar, Institute of Social Studies, Den Haag, March.